Swiss raise the bar on bank clean-ups

The UK set the bar high on bank clean-ups. The Swiss vaulted it. The combined effect of sweeping government initiatives and private capital raising should go some way to shoring up confidence in the country's two biggest banks.

The actions taken by Swiss authorities closely follow those introduced a week earlier by their UK counterparts, but then take them a significant step further. There is a pledge to guarantee new short and medium-term funding if needed, and an immediate "moderate" increase to the deposit protection followed by a thorough revision by next March. The government is also recapitalizing UBS with SFr6bn (£3bn) of mandatory convertibles which will pay a healthy 12.5pc coupon and equate to a 9.3pc stake in the bank.

It's a steep price to pay – but given the SFr74bn of net outflows from UBS' private bank and asset management arms in the third quarter, solutions were thin on the ground. Plus, UBS is unlikely to be prevented from resuming dividends next year and will suffer limited earnings-per-share dilution, giving it an edge over the UK banks receiving government assistance.

But the major improvement on the UK plan is the creation of a "bad bank". This will enable UBS to have one of the cleanest balance sheets in banking, by shifting up to $60bn of mortgage-related and other toxic assets into a central-bank-sponsored special purpose vehicle. It leaves UBS with just $10bn of leveraged loan and monoline exposure.

UBS will supply the "bad bank" with $6bn of equity capital – eating through all of the state's capital injection and more – to accompany a $54bn non-recourse loan from the country's central bank. UBS is selling authorities its equity stake for $1, and has the option to buy it back once the loan is fully repaid. The state gets the first $1bn. Thereafter, any proceeds are split equally between the state and UBS. That means if the bad assets eventually sell at their current marked-down rate, UBS stands to make $2.5bn back.

In addition to its superior public-sector bank bailout plan, the Swiss also managed a better private-sector solution than did the UK. Barclays, the UK bank, avoided taking government funds by persuading regulators it could execute a £10bn do-it-yourself recapitalisation – but not until early next year. Credit Suisse, which is in a far better condition than UBS, declined capital from the Swiss authorities, opting to go it alone too. But unlike Barclays, it already has secured SFr10bn.

Credit Suisse is selling treasury shares usually reserved for bonuses, and issuing mandatory convertible bonds and hybrid capital to existing shareholders from Qatar, Saudi Arabia and Israel. In exchange for this further 12pc stake in the bank, Credit Suisse will bump its Tier 1 capital ratio up to 13.7pc, among the highest anywhere. The news seemed to comfort shareholders, who overlooked the simultaneously announced further write-downs and manic trading conditions which caused a third-quarter net loss of SFr1.3bn.